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Vermeulen, Wouter
van Ommeren, Jos
Year of Publication: 
Series/Report no.: 
Tinbergen Institute Discussion Paper 05-093/3
Why are regional unemployment differentials in Europe so persistent if, as the wage curve literature demonstrates, there is no compensation in labour markets? We hypothesize that workers in high-unemployment regions are compensated in housing markets. Modelling regional unemployment differentials as a consequence of centralized wage bargaining, we show that clearing of land markets may undo the incentive for workers to migrate to low-unemployment regions in general equilibrium. The compensating differentials hypothesis is tested on city-level data for several countries. Controlling for variation in income and amenities, housing is found to be about 3 percent less expensive on average in cities where unemployment is 10 percent up. An analysis of housing demand survey data, which takes account of housing heterogeneity, yields a similar negative relationship. The magnitude of the income effect generated by this compensating differential is consistent with a -0.10 wage curve elasticity. These findings weaken the case for regional support programs.
regional unemployment
housing markets
wage curve
compensating differentials
hedonic models
regional policy
Document Type: 
Working Paper

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